Tax cut to be paid by foreign firms

Multinational corporations could be forced to pay hundreds of millions extra in taxes to fund a cut in the corporate rate.

The business tax working group, which is determining how to fund the cut proposed by Prime Minister
Julia Gillard
this week, is focusing on changes to the thin capitalisation rules that are designed to make it harder for companies to shift profits to countries with lower taxes.

Other options on the table are lower deductions for mining exploration and cutting research tax breaks.

The chairman of the business tax working group and a KPMG partner, Chris Jordan, urged the business community to accept that some breaks will have to go if they are to get a corporate tax rate below 30 per cent.

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“What do they want in the longer term: a broader base with a lower rate or some concessionary treatments in certain sectors or circumstances?" he said.

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Property developers, tax and business groups are already defending tax concessions targeted by Mr Jordan’s committee, which could raise large amounts of revenue by reducing interest deductions for multinationals and local companies with big foreign debts.

The thin capitalisation rules limit the amount of debt in companies to $3 for every $1 of equity. The debt-to-equity ratio could be reduced to 1.5:1, a change Treasury estimates would save $300 million a year. The revenue estimate is widely considered too conservative.

Ms Gillard didn’t say how big a cut she wants to the corporate rate. But she said it must be funded by equivalent cuts in business tax concessions.

Opposition Leader
Tony Abbott
said he backed a tax cut if funded from savings in government spending or economic growth. He said Ms Gillard’s proposal was a “con".

Business groups would prefer tax cuts funded by lower spending or increases in the goods and services tax, which is paid by consumers.

Corporate Tax Association executive director
Frank Drenth
said that unlike other options, toughening the thin capitalisation rule could have a big impact on many industries.

“In some individual company cases it would cost them some hundreds of millions of dollars over four years," he said. “It’s not trivial."

The Property Council of Australia, which represents developers, said the thin capitalisation rule shouldn’t be changed.

“Large organisations and small joint venture businesses alike rely on the current thin capitalisation rules and any changes will deeply impact the cost of property projects," the lobby group’s executive director of international and capital markets, Andrew Mihno, said.

He said that the Property Council supported government initiatives to reduce tax.

The government has already tried to cut the corporate rate. A plan to reduce the rate to 29 per cent was abandoned this year when the Coalition said it would oppose the cut because it would be funded by the minerals resource rent tax, which the Coalition has promised to scrap.

Australian Industry Group chief executive
Innes Willox
, who attended Ms Gillard’s economic summit in Brisbane this week where she announced the tax-cut goal, said changes to the thin-cap rule could affect corporate investment.

“We need to be careful about what we do to achieve this; we’ve got to look at ways where there can be overall economic gains," he said.

The broader exercise of finding savings within the business tax system that Mr Jordan’s group must undertake was “robbing Peter to pay Paul", he said.

“If we’re starting to make cuts in other areas, that’s going to impact on our competitiveness and ability to create jobs," Mr Willox said. “Maybe it shouldn’t be the business community that funds this wholly."

He noted the government has said it won’t expand the GST, which isn’t applied to fresh food or healthcare.

He said he supported discussions about a cut in the corporate rate to improve productivity.

Despite the push-back, Mr Jordan expressed hope for an “open-minded and considered debate".

“Business will have to do a hard-nosed pragmatic analysis of where it’s better off: a lower rate, [or] maintaining some concessionary treatments," he said. “Certainly the world is moving towards lower rates and broader bases. Economists say it is more efficient and less distortionary."

Other options to raise tax revenue include cutting mining exploration deductions, accelerated depreciation benefits for oil and gas companies, and research concessions.

All were identified by Treasury in the group’s interim report on solutions to help small business. None were adopted by the government, which saved $4.8 billion by abandoning the one percentage point corporate tax cut in the May budget.

It used the savings in part to allow small, unprofitable companies to claim tax refunds.

Mr Jordan said the previously discussed options were still the main items under consideration but the group is open for business to propose alternatives. Experts say that won’t be easy.

“There’s not a lot of fat sitting in the business tax system now," Mr Jordan said. “A lot of it was taken out by the Ralph review to reduce the rate to 30 per cent."

The Henry review of the taxation system recommended cutting the corporate rate to 25 per cent.

Greens leader
Christine Milne
said her party would oppose any attempt to cut the rate. The Greens hold the balance of power in the Senate.

Mr Jordan’s group, created by the government’s tax forum last October and comprising business leaders and tax experts, must now double-down on its efforts to find a way to fund a tax cut, after Ms Gillard directed it to prioritise the task over other work.